Short-term, also referred to as payday, loans are an expensive way to borrow if you can’t repay on time and in full. Find out how much they cost and what to watch out for if you’re considering one.
How short-term loans work
Short-term loans are designed to help you get emergency money, usually to tide you over until you get paid. The money is paid directly into your bank account, so you’re free to spend it how you want.
You’ll agree an amount to borrow and can usually choose between one to six months to repay it back. You’ll pay a high rate of interest, so the longer you take to repay, the more expensive it will be.
The lender will also add charges if you fail to pay on time, so taking out a loan could make your situation worse if you can’t afford to repay. Always think carefully before choosing one and consider alternatives first.
What short-term loans cost
Short-term loans are an expensive form of borrowing, however the overall cost is capped by Financial Conduct Authority (FCA) rules.
This law means you’ll pay up to 0.8% in interest per day. So if you borrowed £100 for 30 days and repaid on time, you’d pay a maximum of £24 in interest. If you were late repaying, the most you could be charged is £15.
The cap also means you’ll never pay back more than twice what you initially borrowed. For example, if you borrowed £100, the most you would ever have to pay including interest and charges is £200.
Ways of repaying short-term loans
When setting up a short-term loan, most lenders will ask you to set up a recurring payment (also known as a continuous payment authority or CPA). This lets them take what you owe directly from your bank account on the repayment date.
This can be handy, but you’ll need to make sure you have enough money in your account to cover it – and any other bill payments, such as heating, mortgage or rent. If it takes you over your overdraft limit it could lead to bank charges.
You can ask your lender to cancel a CPA at any time – National Debtline has a letter templateOpens in a new window you can use. If your lender won’t help, ask your bank to cancel instead.
Either way, you’ll still need to repay your loan in another way. If you’re cancelling because of difficulties paying back the money, tell the lender as soon as possible and ask if they can give you more time to pay.
Other repayment options
Before you set up a recurring payment for a payday loan, make sure you understand what your other options are and how they work.
Direct Debit
This gives the lender permission to collect money from your bank account. You benefit from the Direct Debit Guarantee Scheme, which protects you if there’s a mistake with the payment.
You can cancel a Direct Debit by contacting your bank or building society, or through online and mobile banking. Which? also has a letter templateOpens in a new window you can use.
It’s important to tell the lender that you’re cancelling and to arrange another payment method. This avoids any potential late payment penalty fees and negative marks on your credit report.
Standing order
This gives your bank or building society permission to make regular payments to the lender on specific dates for set amounts of your choosing.
You can cancel a standing order, or change the amount, date or frequency, by contacting your bank or building society.
Find out more about Direct Debits and standing orders.
What to watch out for with short-term loans
If you can afford the loan repayments, are happy with the cost and can repay on time, a short-term loan can help plug gaps in your income.
However, the problem comes if you’re unable to repay as this can lead to extra charges and a negative missed payment mark on your credit file. If you’ve already taken out a loan and are struggling to pay, always speak to your lender to agree an alternative repayment plan. Don’t be tempted to borrow more to repay.
See our guide Help if you’re struggling to pay your bills for the steps to follow.
If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living
Have you missed a payment?
Use our Debt advice locator tool to find free and confidential debt advice online, over the phone or near to where you live.
Credit brokers might charge you a fee
When looking for a short-term or payday loan, there are companies that search multiple lenders for you – look for the phrase ‘we act as a credit broker not a lender’ on their website. Some are paid commission by lenders, but others will charge you a fee for their services.
If a fee is charged, credit brokers must clearly display this before you sign up.
When not to get a loan
Lenders advertise short-term loans as a solution to a range of cash flow problems. But it’s likely to be the wrong choice if:
- you plan to use it to pay off other debt
- you already rely on other borrowing, such as another loan
- you’re not certain you’ll be able to pay it back on time
- you want it to pay for things you can’t afford.
Join our private Debt Support Community Facebook groupOpens in a new window to help give you new ideas to tackle debts and keep you motivated
If you apply for a short-term loan
Before taking out any loan, think carefully about how you’re going to pay it back.
If you’re short of money this month, think about whether you’ll have the payment plus interest available next month. Are you expecting extra income? Or are you going to have to cut back on your spending?
Before applying, which is recorded on your credit record, look for an eligibility checker so you can see your chances of acceptance. This uses a ‘soft search credit check’, so you’ll see if it’s worth applying without leaving a mark on your credit file.
If you do decide to get a loan, always check the lender or credit broker is registered on the FCA’s Financial Services RegisterOpens in a new window
Scams warning
If you take out a loan with an unauthorised firm, you won’t be covered by the Financial Ombudsman Service if things go wrong. You can report a scam to FCAOpens in a new window
The 14-day cooling off period
If you change your mind, you can withdraw from the loan agreement at any time within the first 14 days. All you need to pay is the interest on the credit you’ve used. Any extra charges must be refunded to you.
